Deutsche Bank Markets Research Asia Industry Date Hong Kong 25 July 2016 Utilities China Gas Utilities Utilities Company Update Hanyu Zhang Michael Tong, CFA Research Associate Research Analyst 1H16 preview for gas utilities: BEHL (+852 ) 2203 6207 (+852 ) 2203 6167 remains to be our top pick [email protected] [email protected] 1H16 preview: BEHL is likely to show strongest growth momentum Focus stocks We expect that within China gas utilities space under our coverage, BEHL is Beijing Enterprises (0392.HK),HKD46.00 Buy likely to record highest recurring earnings growth in 1H16 (DBe +19%) driven Price Target HKD57.70 by 23%/6% yoy retail/transmission volume growth and consolidation of EEW (3 China Gas Holdings (0384.HK),HKD12.16 Buy months), partially offset by earnings decline in beer segment (DBe -12%) and Price Target HKD14.00 lower profit contribution from China Gas (reported net profit -45% yoy in ENN Energy (2688.HK),HKD38.05 Hold Price Target HKD42.60 2HFY16). ENN/CR Gas is likely to post mid-teen bottom-line growth while CR Gas (1193.HK),HKD23.60 Hold Price Target Towngas may grow much slower at 5% due to lower-than-peer volume HKD23.40 growth. Kunlun is likely to record another 17% yoy earnings decline for its Towngas China (1083.HK),HKD4.73 Hold Price existing business, but reported net profit may improve 4% yoy after Target HKD4.20 consolidating Kunlun Gas (deal completed in Jun 2016). Kunlun Energy (0135.HK),HKD5.94 Sell Price Target HKD5.40 Volume recovery expected, margins to remain stable in 1H16 Source: Deutsche Bank According to NDRC, China natural gas demand growth recovered to 10% yoy in 1H16 from 5% in 2015. We expect gas companies to show similar recovery trends. BEHL may record highest volume growth (DBe +23%) mainly driven by power and heating segment. CR Gas/ENN is likely to be on track to achieve their full year volume growth guidance, while Towngas may fall a bit short of the target. We expect gas sales margins to remain stable in 1H16 with slight upside from residential tiered-pricing reform. 2H16 key trends to watch; Buy BEHL/China Gas, Sell Kunlun As discussed in our gas sector FITT report (Navigating through the clouds for Sunshine, published on 9 Jun 2016), some new policy trends including a more transparent transmission tariff mechanism and gradual open-up of LNG terminals could be positive to gas distribution business. On the other hands, short-term gas volume recovery is still a function of gas price competitiveness, industrial activities, and government’s efforts to fight pollution. We reiterate our pair-trade idea of BEHL(Buy)-Kunlun(sell). Besides, we like China Gas (Buy) due to its multi-faceted growth in natural gas sales/new connections/ LPG business with least FX risk exposure. Figure 1: China gas utilities – 1H16 preview Retail volume yoy growth Recurring net profit Company name Ticker Currency 2015 2016 1H16E 1H16E yoy as % of guidance FY16E BEHL* 0392.HK HKD mn 31% 15% 23% 3,682 19% 55% ENN 2688.HK RMB mn 7% 10% 10% 1,580 14% 51% CR Gas 1193.HK HKD mn 9% 15% 14% 1,802 15% 54% Towngas 1083.HK HKD mn 1% 10% 7% 670 5% 55% Kunlun** 0135.HK HKD mn -4% N.A 5% 1,993 4% 50% Source: Company data, Deutsche Bank; *We estimate BEHL’s net profit to increase by 14% yoy before consolidating EEW ** Kunlun’s retail volume growth excludes Kunlun Gas; 1H16e earnings consolidate Kunlun Gas while 1H15 number is not restated ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Distributed on: 07/25/2016 12:02:27GMT The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr; MCI (P) 057/04/2016. .